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PRINCIPLES OF FUTURES, There are three different types of spreading :,…
PRINCIPLES OF FUTURES
OFFSETTING VS SETTLEMENT
OFFSETTING
Futures can be closed-out by merely taking the deal opposite position, or opposite position to the initial position.
By taking an offset position, every flexible contract or position may be closed-out prior to maturity.
A trader who has a purchasing position may offset his position by selling, and vice versa.
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TRADING PRACTICALITIES
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MARGIN REQUIREMENT
is a legal requirement for every participant and normally 5%-10% (represents commitment of both parties)
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CONVERGENCE
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:warning: 2 price must converge in order to avoid an exists arbitrage opportunity and risk-free-profit
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MARKET PARTICIPANTS
HEDGERS
A hedger is any individual or firm that buys or sells the actual physical commodity. Many hedgers are producers, wholesalers, retailers or manufacturers and they are affected by changes in commodity prices, exchange rates, and interest rates
SPECULATOR
Speculators are primary participants in the futures market. A speculator is any individual or firm that accepts risk in order to make a profit. Speculators can achieve these profits by buying low and selling high.
SPREADER
Spreader is taking two opposite positions, that is buying on contract and selling the other in futures market.
ARBITRAGEUR
Arbitrage occurs when a security is purchased in one market and simultaneously sold in another market, for a higher price.
The purpose of arbitrage is to take advantage of the difference in prices available for the same financial instrument being offered on different exchanges.
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Amount deposited when the contract is originally purchased or sold and represents 'faith money' in order to initiate his trading
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Minimum amount to be maintained throughout the life of his contract. Trader will have to top up his account if margin account < maintenance margin
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Amount in the margin account that will vary according to the closing prices and considered as the current balance.
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The broker 'calling' an investor to top up so the margin account = initial margin. This margin only enforceable when current margin < maintenance margin.
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Every futures contract has its underlying physical instrument in the cash market. The prices is based on the actual price of its underlying instrument
Grade or quality of the instrument is specified to ensure that participants trade the same type and quality of underlying instrument. Financial futures are graded on the quality of the financial requirements.
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Contract is traded in specified month, which is simply the month of maturity or expiry. Every futures market must enable trades in the spot, current and future or forward month.
Each future contract has its own maturity or expiry date. Hence futures contract ceases to exist after the expiry date